IRA Section 13902 – Increase in Research Credit Against Payroll Tax for Small Business

Section 13902 of the IRA amends Sections 41(h) and 3111(f) of the IRC to increase the small business payroll tax research credit by allowing small businesses to claim a tax credit in the amount of research and development expenses. The amount is increased from $250,000 to $500,000. Previously, Section 41(h) of the IRC only allowed small businesses to claim a tax credit against their share of the Social Security (or FICA) tax for employees. The IRA amends Section 41(h) to allow small businesses to also claim a tax credit against their Medicare Hospital Insurance tax liability.

Note that while the tax credit maximum amount is increased, the amount is actually divided into two. A small business can only claim a maximum of $250,000 tax credit for each tax liability (either FICA or Medicare). Small businesses may claim this tax credit beginning 2023. Unused credits can be carried forward to future tax years.

To qualify as a small business, the entity must:

1) have less than $5 million in gross receipts;
2) did not have gross receipts for any taxable year more than 5 years prior to the end of the current year.

To be covered, the research must be:

1) technological in nature;
2) intended to be useful in the development of a new or improved business component;
3) must relate to a new or improved function, performance, or reliability or quality.

The research may conducted in-house or contracted out.